Accurate VAT determination through to draft tax advice
Artificial Intelligence (AI) is rapidly gaining ground in tax technology – see how tax authorities are adopting AI.
For Value Added Tax (VAT) in particular—where complex rules vary across jurisdictions and change frequently—AI promises to enhance accuracy, speed, and scalability in compliance and advisory work.
Three areas stand out as particularly well-suited for AI in VAT:
- Item classification. Correctly determining the VAT treatment of goods and services is a challenge for multinational businesses. AI can assist by rapidly analysing product attributes and matching them to tax categories, reducing reliance on manual interpretation.
- Advice writing. AI can also support professionals in preparing draft analyses and recommendations, transforming structured VAT content into clear, usable outputs that save time and improve consistency.
- Data gathering. agentic AI offers low to no-code route to ingest data in any form to repurpose for VAT determination and e-reporting obligations.
However, the opportunities come with well-documented risks. Chief among these is the problem of “hallucinations”—AI systems producing answers that sound authoritative but are in fact wrong. In the high-stakes world of VAT, even small errors can result in penalties, disputes, and reputational damage. AI models trained on incomplete, unverified, or generic data sources are particularly vulnerable to such failings.
This is why VATCalc takes a different approach. With its Advisor solution, VATCalc combines AI’s automation with a foundation of carefully curated, global VAT content maintained by tax experts. Rather than relying on unstructured or unreliable data, VATCalc grounds its AI in a verified and constantly updated knowledge base of VAT legislation, rates, rules, and practical guidance.
The benefits of this model are clear:
- Accuracy in item classification. AI can suggest VAT categorisations quickly, but always within the boundaries of expert-maintained global VAT data.
- Confidence in advice. Advisor generates draft guidance that reflects verified content, minimising the risk of hallucinations or incomplete analysis.
- Scalability with assurance. Businesses can operate across multiple jurisdictions knowing the underlying data is dependable, consistent, and current.
By anchoring AI in trusted, curated content, VATCalc demonstrates how technology can be harnessed responsibly in VAT. The result is a system that provides the efficiency of AI without exposing users to the risks of unreliable outputs.
As AI adoption accelerates, tax technology providers face a pivotal choice: embrace speed at the expense of reliability, or combine innovation with safeguards that ensure quality. VATCalc Advisor shows how the latter path not only mitigates risk but also delivers real, lasting value to tax professionals navigating the complexities of global VAT.
Global adoption of VAT by tax authorities
Beyond the UK, tax authorities around the world are adopting AI to improve errors and fraud, as well as improve the tax payer experience:
- UK HMRC is building Large Language Model to help identify VAT evasion
- Malta claims it raised tax tax by €400m in 2024 using predictive AI
- Greece is establishing a specialist AI unit using MyDATA VAT transactions for detecting fraud.
- Austria AI unit has been targeting missing trader VAT fraud with impressive results.
- Romania claims to have boosted VAT receipts by up to 1% in the last 12 months via AI and robot adoption.
- Italy, possibly the most fervent users of AI for detecting tax evasion, last year identified over 1 million high-risk cases with AI-driven data analysis. This includes a latest algorithm that cross references financial data to identify taxpayers at risk of not paying. Its VeRa algorithm compares tax filings, earnings, property records, bank accounts and electronic payments looking for discrepancies. High-risk taxpayers then receive a letter asking them to explain the differences. The more data VeRa processes, the smarter it becomes.
- Vietnam has announced that it will be adopting Artificial Intelligence before the end of 2023 to help identify tax fraud. This includes, for example, to flag firms that issue invoices too often, for unusually high amounts or in other ways indicating attempts to slash taxable revenue.
- Australia claims to have identified over $530 million in unpaid tax bills and prevent $2.5 billion in fraudulent claims using AI models, including deep learning and natural language models.In addition to detecting underpayments, the ATO’s AI systems have also been utilized to combat GST fraud. This includes the ATO has employing gradient-boosting machine learning models, which have been successful in identifying fraudulent behavior patterns.
- US, the Inland Revenue Service has drawn-up a second-half 2023 plan to adopt Artificial Intelligence technologies and algorithms. It will be adding AI tools to identify taxpayers who make $1 million and up, and have more than $250,000 The IRS’ initial focus will be using AI analysis to replace existing paper-based reporting and returns. Its existing Modernized e-File (MeF) system already accepts 76% of paper tax returns processed without human intervention. This next phase will be about experimenting and adopting AI models to extract valuable information from this exercise.
- India from May 2023 is using AI to identify fraudulent applications for input tax credits via false GST registrations. The central government’s Business Intelligence and Fraud Analyst (BIFA) site, the e-way portal, and the Rajasthan government’s Business Intelligence Unit (BIU) would collaborate to detect GST numbers that appear to be false.
- India‘s Income Tax Department is using AI to identify falsified income tax deductions. It uses algorithms designed to identify unusual ratio’s between income and political or charitable donations.
- Malta, UK, Canada, the Netherlands and Ireland use an AI system that daily compares wealth based on public sources with that declared in their VAT and tax returns. It also sources public registers, bank accounts (in limited circumstances) to identify undeclared assets and spending.
- Sweden deploys AI to identify and highlight tax risk issues when businesses apply for new incorporations. Since 2021, it has been able to review for tax avoidance flags in registration applications. This has also helped speed-up the application process by reducing the manual time required in reviewing documentation.
- Poland’s System Teleinformatyczny Izby Rozliczeniowej (STIR), analysis data provided daily by banks and credit unions report account data and clearinghouse data on a daily basis for all transactions carried out by taxpayers. It enables the National Revenue Administration (NRA) to detect potential carousel frauds in near-real-time, versus the two months that might have been needed previously.
- France uses AI satellite image scanning to identify signs conspicuous consumption. This can include multiple cars or swimming pools appearing at residents of person under tax investigation. This is particularly useful for local direct taxes (real estate tax).
- Singapore’s Inland Revenue Authority has developed an in-house network visualiser with graph database as an underlying technology to address its auditors’ needs. This tool provides auditors with customised functionalities to analyse intricate, multi-layered relationships between entities during audits/investigations. It can also uncover relationships more than 10 connections deep in a real-time manner.
- Xenon is a tool used by six European countries to investigate tax evasion based on internet searches and surveillance. It was originally developed by The Netherlands
- Brazil has been using AI behavioural insights (called ‘High Performance Inspection’ (FAPE)) to analyse the outcomes of varying standard tax letter requests to taxpayers. It has been evaluating the response of the taxpayer based on their particular background and circumstance to determine the optimum tax communications tone and lever of affirmation. From this, the authorities are able to determine the best approach to take with future taxpayer queries or audits.
- Aside from using AI to detect potential tax fraud or errors, most authorities are now using AI to assist the efficiency of their own compliance and administrative activities. This can include recruitment processes. Countries such as Canada and Singapore are leading the way on this.
- As common on must large private sites, the tax authorities are increasingly using AI-driven virtual assistants. The list of countries includes: Spain, Peru, Australia, Canada, the United Kingdom, Ireland, Finland, Sweden, Latvia, Estonia, the Republic of China, Russia, Singapore, Guatemala, Chile, Mexico, Costa Rica, Colombia and Brazil.
